Centre intervening to cushion Re slide and boost dollar inflows

Centre intervening to cushion Re slide and boost dollar inflows

Subject: Economy

Section: External Sector

Context:

• The US dollar has strengthened not only against the Indian rupee but against many other major currencies, an official said, adding that this year the rupee has strengthened against the Euro, the Japanese yen and the British pound.
• Reserve Bank have been taking steps to attract dollar inflows and make the dollar appreciation against the rupee more gradual and smoother.

Major reason for Rupee Slide

• Capital outflows by foreign portfolio investors (FPIs) as the US Federal Reserve started the monetary policy tightening and interest rate hikes.
• increase in inflation rate in the US and developed countries led to their central banks responding by raising interest rates (the monetary policy tightening)
• The Ukraine war raised the oil prices and uncertainty. On account of both these reasons, investors turned cautious. When they become cautious, they begin pulling money out of emerging markets like India. Foreign investors have pulled out nearly $31.5bn total from the beginning of FY22 and up to July 15 in 2022-23.
• The rise in the price of oil has pushed up India’s import bill this year, which also implied more demand for US dollars to pay for crude oil.
• Due to rise in oil prices Inflation also increased in India thus creating more Rupee in comparison to Dollar lead to Re depreciation

RBI has taken the following measures to boost FOREX.

• There is a limit on how much corporates can borrow (External Commercial Borrowing) from abroad annually. This limit has been doubled to $1.5 Billion. Actually when Indian companies borrow from abroad in foreign currency or dollars then they convert this dollar into rupee in our forex market. They sell dollars and purchase rupees, so that they can invest in India. This increases the demand of rupee and rupee appreciates.
• RBI regulates (puts ceiling limits) interest rates on NRI deposits in India. (FCNR and NRE accounts). This limit has been removed temporarily to attract more NRI deposits.
• Banks have been exempted from maintaining CRR and SLR on new/additional NRI So, banks will try to attract more NRI deposits and they will be able to offer some higher interest rates to NRIs because banks cost of funds will get reduced as they don’t need to keep CRR & SLR.
• Under ‘Fully Accessible Route (FAR)’, RBI has removed any cap/limit on FPIs debt investment in Government Securities. But this was not available for all types/tenures of Govt. securities. So, now this has been widened to several types of Govt. securities.